Saturday, May 2, 2015

Dark Matter or Base Erosion & Profit Shifting?

Tim Taylor provides some interesting data but I think his discussion fell short:
Here's the evolution of US net international investment position, as shown by the size of foreign assets and liabilities, in the last few years … In the last few years, the gap between US assets and liabilities has clearly been rising.
Tim cites the latest from the BEA which indicates that the U.S. holds $24.6 trillion in foreign assets while foreigners hold $31.6 trillion in our assets. So we have net debtor position equal $7 trillion at these recorded values. BEA’s Table 4.1 - Foreign Transactions in the National Income and Product Accounts – shows that we received $0.8 trillion in income on our holdings of foreign assets while foreigners receive only $0.6 trillion. What to make of this fact that the return on our holdings of foreign assets is 3.25% while foreigners receive only a 1.9% return? Tim notes this simply as:
US investors abroad are more likely to make higher-risk, higher-return investments in equities or ownership of foreign assets.
Ricardo Hausmann and Frederico Sturzenegger took the income flows reported by BEA and discounted them by 5%, which was the long-term government bond rate back then. If we updated their Dark Matter story using a 2% government bond rate representing current market conditions, the value of our holdings of foreign assets would be $40 trillion whereas the value of the U.S. assets held by foreigners would be only $10 trillion. In other words, they might argue that this is $17 trillion in Dark Matter. Willem Buiter’s Cold Fushion casts serious doubts about this Dark Matter as did BEA’s Ralph Kozlow. Kozlow’s transfer pricing story is still on the BEA website:
Transactions between foreign direct investors and their U.S. affiliates may occur at prices (“transfer prices”) that result in the U.S. affiliates recording low profits. Earnings on foreign direct investments, while still relatively low, have grown briskly over the last few years. Is the rate of return for foreign direct investment in the U.S. artificially low because foreign direct investors understate their U.S. profits through transfer pricing? Some researchers have argued that transfer pricing explains why the rate of return that foreign investors earn on their direct investments in the U.S. is lower than what U.S. investors earn on their direct investments abroad.
Kozlow also credits a paper by Daniel Gros. The OECD Base Erosion & Profit Shifting crowd is interested in these issues as Action Plan 11 states:
Establish methodologies to collect and analyse data on BEPS and the actions to address it. Specifically to: Develop recommendations regarding indicators of the scale and economic impact of BEPS and ensure that tools are available to monitor and evaluate the effectiveness and economic impact of the actions taken to address BEPS on an ongoing basis. This will involve developing an economic analysis of the scale and impact of BEPS (including spillover effects across countries) and actions to address it. The work will also involve assessing a range of existing data sources, identifying new types of data that should be collected, and developing methodologies based on both aggregate (e.g. FDI and balance of payments data) and micro-level data (e.g. from financial statements and tax returns), taking into consideration the need to respect taxpayer confidentiality and the administrative costs for tax administrations and businesses.
This strikes me as an incredibly ambitious agenda. If anyone knows of an update to the Buiter-Gros-Kozlow insights, this could prove very useful.


Thornton Hall said...

In a recent discussion in comments Sandwichman referenced the mise en abyme.

Accusations of plagiarism are simply one version of the enforcement of intellectual property rights. There is much discussion of late pointing to the idea that strong IP protections diminish the "innovative capacity" of a society.

Indeed, the war stories in your paper make one thing perfectly clear: academic incentives are poorly aligned with the goal of increasing knowledge. Learning about the process is like learning about how movies get made: it reveals that the creation of a movie worth seeing is a beautiful accident.

If one were to start from scratch building a system of education such a system would have no use whatsoever for publishing or battles about plagiarism. Let the researchers fight it out. We at universities are interested in truth.

Peter said...

Krugman talks about the how the US stock market is doing better than foreign markets. said...

More generally this is indeed a result of the "flight to safety" phenomenon, as it has been going on since well before the recent rise of the US stock market. US has been a net debtor for 30 years, but capital income flows have remained in surplus throughout.

The US may not really be safer, but the perception that it is has offered low but safe returns on bonds for Americans, who to get higher yields have taken risks and invested abroad. So, our foreign investmetns have been high yield, but probably riskier, while foreigners' in US have been lower yield and safer.

ProGrowthLiberal said...

Lots of explanations. I just read a November 30, 2005 CBO report which estimated the return to direct foreign investment. US affiliates of foreign multinationals received an ROA of only 2.2% whereas foreign affiliates of US multinationals got an ROA closer to 7.6%. This strikes me as the transfer pricing story.

JKH said...

"Dark Matter" is voodoo accounting. Risk-oblivious silliness.

Transfer pricing and data issues may play a role. Who knows the answer to that.

But US Treasuries held by foreigners esp. central banks are an undoubted piece of the puzzle.